A new ‘balancing’ approach to remedies under the Foreign Subsidies Regulation? Some initial observations on the ADNOC/Covestro commitments

On 19 November 2025, the European Commission (“EC“) published the final commitments offered by the Abu Dhabi National Oil Company (“ADNOC“) to obtain approval for its EUR 14.7 billion acquisition of Covestro, a German chemicals producer, under the EU’s Foreign Subsidies Regulation (“FSR“). While the EC’s clearance decision is not yet available, a few observations can already be made based on the commitments (available on the case page here) and the EC’s press release from 14 November 2025 announcing the clearance.

In brief, the ADNOC / Covestro commitments suggest that the EC’s enforcement of the FSR continues to evolve – notably, the EC cleared the deal based, in part, on remedies that do not eliminate the distortion concern identified but which provide benefits that outweigh the negative effects of the deal. This approach suggests a creative application of the ‘balancing test’ envisaged in the FSR. As well as “solving” the distortion concern, the ADNOC / Covestro remedies achieve two other aims: securing much needed investment into the EU (a German government priority in this case) and furthering a broader EU policy objective (sustainability).

It’s also illuminating to compare the outcome in ADNOC / Covestro with e& / PPF Telecom – the second and first Phase II investigations under the FSR, respectively – especially, as both involved European targets bought by State-owned acquirers from the United Arab Emirates (“UAE“), both received distortive foreign subsidies, and both were cleared with remedies. Both cases also involved an unlimited State guarantee that had to be removed as a condition of clearance (to avoid financing the merged entity’s activities in the EU on preferential terms).  For reasons not yet clear, ADNOC appears to have dodged a few bullets – i.e., some onerous commitments – that were a condition of clearance in e& / PPF Telecom but which seem to be absent here. A difference in material facts or some clever lawyering? No doubt a bit of both.

An overview of the case and some initial observations are set out below.

Overview of FSR-related concerns and remedies in ADNOC / Covestro

In ADNOC / Covestro, the EC identified two main foreign subsidies of concern: (i) an unlimited State guarantee to ADNOC via the UAE’s bankruptcy code (as in e& / PPF Telecom); and (ii) a EUR 1.17 billion post-closing capital injection into Covestro by ADNOC.

The EC found that these foreign subsidies were liable to distort competition in the acquisition process (which wasn’t a concern in e& / PPF Telecom) and in the combined entity’s activities in the EU post-merger (which was). On the first point, the EC found that the committed capital injection into Covestro by ADNOC made the latter’s offer for the company so favourable that other investors may have been deterred from making an offer. On the second, the EC considered that, overall, the capital increase and unlimited guarantee would have artificially improved the capacity of the merged entity to finance its activities in the EU and would have increased its indifference to risk, leading to more aggressive investment strategies than absent the subsidies to the detriment of other market participants and competition in the EU (as in e& / PPF Telecom).

The EC accepted two main commitments, lasting for 10 years, to remedy these concerns:

1. ADNOC committed to adapt its articles of association to remove the unlimited State guarantee (as in e& / PPF Telecom); and
2. Covestro committed to (i) license its patents to sustainability-related technologies on market-standard terms to certain market participants (other than competitors); and (ii) continue R&D collaborations with certain competitors (together, the “IP commitment”).

As in e& / PPF Telecom, the EC required removal of the unlimited State guarantee to ADNOC to address its concerns about the merged entity being able to finance its EU activities on preferential terms, with potentially negative effects on other market operators. In addition, the EC was satisfied that the IP commitment, which received positive market feedback, would resolve remaining competition concerns, including because of potential spillover effects for innovation in the chemical industry (in particular, the sustainability segment).

Some initial observations on the ADNOC / Covestro remedies

A few things stand out from the ADNOC / Covestro commitments (so far as we can tell), which hint at a more flexible and creative approach to resolving distortion concerns under the FSR.

• First, it’s notable that Covestro’s IP commitment doesn’t eliminate the source of the distortion (the capital injection) but rather “balance[s] out [its] negative effects”. While this approach isn’t necessarily at odds with the language of the FSR, which requires that commitments “fully and effectively remedy the distortion” (Article 11(3) FSR), it seems to import the notion of the ‘balancing test’ into the EC’s assessment of a remedy’s effectiveness . A straightforward reading of the FSR suggests that the balancing test – which involves weighing the positive effects of a foreign subsidy against its negative effects – is a step prior to determining whether remedies are required and, if so, the nature and extent of such remedies (recital 21, Article 6 FSR). However, the EC doesn’t appear to have followed this two-step approach in ADNOC / Covestro, as there is no mention in the press release of the EC carrying out the balancing test (as one would expect if it had). Instead, the press release states the benefit flowing from the remedy (i.e., market access to Covestro’s sustainability-related patents) – rather than any positive effects of the foreign subsidy per se – will balance out the negative effects of the transaction. If this understanding is correct (and we will see when the decision is published), it suggests that the EC applied the FSR creatively to design a remedy that “resolved” the distortion concerns raised by the capital injection while keeping ADNOC’s investment. Crucially, the remedy did not block the capital injection itself, as one might expect.

• Second, the design of the IP commitment reflects the balancing test in another way – namely, by articulating the benefit flowing from the remedy in terms of its ability to advance a wider EU policy objective (sustainability). This framing mirrors the language of the balancing test, which provides that when weighing the overall effects of a foreign subsidy, the EC should “examine broader positive effects in relation to the relevant policy objectives, in particular those of the Union” (recital 21). The remedies in ADNOC follow this logic, defining the scope of Covestro’s IP commitment by reference to sustainability concepts from the EU Clean Industrial Deal, which reflects the EU policy objectives of “decarbonising the economy”, realising “circularity”, and achieving “climate neutrality”, etc. It will be interesting to see whether the EC considered if any positive effects flowed from the capital injection (i.e., the foreign subsidy at issue) itself, as the press release seems to imply that the narrow benefit to Covestro from the investment did not count as a “positive effect” for the purposes of the balancing test. In any event, the EC was satisfied that benefit of the IP remedy to the wider industry, which would advance the EU’s sustainability goals, outweighed the negative effects on competition from the subsidy. In future, parties will surely pay close attention to possible ‘balancing’ remedies that could be offered to offset distortion concerns by advancing wider EU policy objectives.

• Third, the ADNOC / Covestro remedies are missing several elements that featured in the e& / PPF Telecom commitments, notably: (i) a bar on the acquirer group financing the target’s EU business (subject to limited exceptions), (ii) a requirement for commercial dealings between the target and acquirer group to be on market terms; and (iii) an obligation for the target to notify future below-threshold acquisitions to the EC. Without seeing the EC’s decision, it’s not clear whether the absence of these elements in ADNOC / Covestro reflects differences in the foreign subsidies at issue or the acquirer’s ownership structure (e.g., unlike in e& / PPF Telecom, there were no government grants, loans, and repayable advances to a parent entity – UAE’s sovereign wealth fund – that could have been used to finance the target’s EU activities) or whether the EC was simply persuaded to take a different approach despite similarities. An unhelpful dynamic in e& / PPF Telecom, which may have played a role, was e&’s refusal to provide information on the nature and purpose of a broad swath of subsidies its parent entity had received, despite multiple requests from the EC to do so – and perhaps e& paid a price in terms of more restrictive commitments. Either way, the absence of similar subsidies in this case suggests the risk of distortion to competition in the internal market may have been lower here than in e& / PPF Telecom, which may explain why the ring-fencing and notification obligations were not required here. Consequently, there appear to be no restrictions on ADNOC making future investments into Covestro’s EU operations, and ADNOC will welcome not having to report future below-threshold acquisitions to the EC. Once again, further evidence of the EC showing flexibility in its enforcement of the FSR, as well as a willingness to drop certain onerous conditions where there are good reasons to do so.

A new approach to resolving FSR concerns?

At this juncture, it’s not clear whether the EC’s use of ‘balancing’ remedies in ADNOC / Covestro heralds a new, flexible approach to resolving the distortive effects of foreign subsidies or whether the approach is largely specific to the facts – e.g., the nature of ADNOC’s investment (a committed capital increase). Perhaps the EC also assessed that residual distortion concerns were weak (i.e., after the unlimited guarantee was removed), resulting in a greater appetite to ‘balance out’ any negative effects on competition with a remedy linked to wider policy goals. Certainly, it’s difficult to see a similar approach working in e& / PPF Telecom, given the gravity of the distortion concerns (the impact of subsidised investments on less well-funded rivals) and the lack of an obvious remedy to ensure that any subsidised investments would generate industry-wide benefits comparable to the IP remedy in ADNOC. Perhaps it is exactly the potential for positive spillover effects that limits when a ‘balancing’ remedy will be accepted.

That said, one suspects the EC’s creative approach to ‘balancing’ remedies in ADNOC / Covestro will be a template for future cases – in particular, where ‘favoured’ State-subsidised acquirers (i.e., that don’t raise national security concerns) can support vital investment into European industry. As such, deal makers facing an in-depth FSR review should think early on about possible remedies that could be used to offset distortion concerns by way of advancing wider EU policy objectives. And while the FSR doesn’t allow for commitments to be offered at Phase II, being ready to offer an appropriate remedy early in the process may limit the need for lengthy ‘stop-the-clocks’, as happened in e& / Telecom and ADNOC / Covestro.